Can a Reverse Mortgage Be Used to Purchase a Home?

If you’re a homeowner over the age of 62, you may have heard about reverse mortgages as a way to access the equity in your home. But did you know that a reverse mortgage can also be used to purchase a new home?

In this article, we’ll explore using a reverse mortgage for a home purchase, discuss the benefits, and who is a good candidate for this option.

What is a Reverse Mortgage?

Before we dive into using a reverse mortgage for a home purchase, let’s first understand what a reverse mortgage is.

The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), also called a HECM loan or HECM reverse mortgage. It is backed by the federal government through the Federal Housing Administration (FHA), the U.S. Department of Housing and Urban Development, and the Consumer Financial Protection Bureau (CFPB).

A reverse mortgage is a loan only available to homeowners over 62 years of age that allows them to access the equity in their homes. The home must be the primary residence of the homeowners to qualify. A reverse mortgage cannot be used on vacation homes or investment properties.

Unlike a traditional mortgage, where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the borrower. The borrower can receive the loan payments as a lump sum, a line of credit, monthly installments, or a combination of these methods.

There are no rules about how reverse mortgage proceeds have to be used. They are commonly used to supplement retirement income, to pay for major home renovations, or as an emergency fund.

The amount of money borrowers may receive is based on three factors: home’s value, the age of the youngest borrower, and current interest rates.

One common myth about reverse mortgages is that the bank is buying the home from the homeowners. This is not the case. The homeowners still retain ownership of the house. For this reason, homeowners must still pay property taxes, homeowner’s insurance, and home maintenance.

The loan is repaid when the last borrower moves out, sells, the home is no longer the primary residence, or passes away.

How to Use a Reverse Mortgage for a New Home Purchase

While a reverse mortgage loan is a good option for those who want to retire in place, it’s not uncommon for homeowners to relocate in retirement, whether they want to upsize, downsize, or seek a warmer climate.

For those who want to purchase a new home but also want the benefits of a reverse mortgage, the Home Equity Conversion Mortgage for Purchase (HECM for Purchase) may be the solution they are looking for.

A Reverse Mortgage for Purchase is a financial tool that enables home buyers to finance approximately half of the purchase price of a new home through a reverse mortgage combined with a large down payment from the sale of their previous home.

This innovative approach consolidates the processes of buying a new home and securing a reverse mortgage into a single transaction, thereby reducing the burden of multiple closings and associated costs.

Similar to traditional reverse mortgages, this arrangement does not require borrowers to make monthly mortgage payments on the portion covered by the reverse mortgage, provided the home remains their primary residence.

Borrowers must also uphold their loan responsibilities, including paying property taxes, homeowners’ insurance, maintenance expenses, and applicable homeowners’ association (HOA) fees.

The HECM for Purchase program was established by HUD in 2009 to streamline the home buying and reverse mortgage process. Before its inception, buyers typically underwent the cumbersome and costly process of obtaining a traditional mortgage to purchase a home, followed by acquiring a reverse mortgage shortly after, incurring double the closing costs and additional complexities.

Benefits of Using a Reverse Mortgage for a Home Purchase

This financial tool offers several advantages that can significantly benefit retirees looking to transition into a new home, including the following:

Reduced Monthly Expenditures. One of the most immediate benefits of a HECM for purchase is the elimination of monthly mortgage payments, which significantly lowers monthly living costs. This feature can free up income for other expenses or leisure activities, enhancing the quality of life in retirement.

Preservation of Savings. Opting for a HECM for purchase allows retirees to conserve a larger portion of their retirement savings. In a phase of life where income might be fixed, maintaining a substantial nest egg is crucial for covering unexpected expenses and ensuring financial security.

Access to Better Housing. A HECM for purchase can help buyers qualify for higher-value homes than might be possible if using a traditional forward mortgage. This advantage enables retirees to live in a home that meets all their desires and needs without overextending their financial resources.

Drawbacks of Using a Reverse Mortgage for Purchase

While there are benefits to using a reverse mortgage for a home purchase, there are also some drawbacks to consider.

Reverse mortgages usually have higher interest rates than regular mortgages. However, when comparing the two options, many people find the benefit of no monthly mortgage payments greater than the difference in interest rates.

There are property types that don’t qualify for a HECM for purchase. For example, a co-op unit and certain manufactured homes may not qualify for this program.

Is a Reverse Mortgage for Purchase Right for You?

Deciding whether a reverse mortgage for a home purchase is right for you depends on your individual financial situation and goals. Here are some factors to consider:

Your age. You must be at least 62 to qualify for a reverse mortgage for purchase. If you are younger than this, a traditional mortgage may be a better option.

Your current home equity. The amount of equity you have in your current home will determine how much you can access with a reverse mortgage. If you have significant equity, a reverse mortgage for purchase may be a more viable option.

Your long-term plans. Do you want to stay in your current home or move? If you are looking to downsize or move to a new location, a reverse mortgage for purchase may be a good fit.

Your income. If you want to relocate but live on a fixed income, a HECM for purchase may allow you to move without taking on monthly mortgage payments.

It’s essential to carefully consider all options and consult with a financial advisor before making any decisions about a reverse mortgage.

Bottom Line

A reverse mortgage for purchase presents a viable option for those over 62 seeking to buy a new home while enjoying the financial flexibility that comes with reverse mortgages.

By eliminating monthly mortgage payments, preserving retirement savings, and providing access to better housing, this innovative tool can significantly enhance retirees’ quality of life. However, potential buyers must weigh the higher interest rates and specific property type restrictions against these benefits.

Consulting with a financial advisor is important to determine if this approach aligns with your retirement goals and financial situation.

Reverse mortgage borrowers must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.

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